Varieties and alternatives of catching up asian development in the context of the 21st century

Varieties and
Alternatives of
Catching-up
Asian Development in the Context of the 21st Century

Edited by
Yukihito Sato
and Hajime Sato


IDE-JETRO Series


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Yukihito Sato • Hajime Sato
Editors

Varieties and
Alternatives of
Catching-up
Asian Development in the Context

of the 21st Century


Editors
Yukihito Sato
Interdisciplinary Studies Center,
IDE-JETRO
Chiba, Japan

Hajime Sato
Area Studies Center, IDE-JETRO
Chiba, Japan

IDE-JETRO Series
ISBN 978-1-137-59779-3
ISBN 978-1-137-59780-9
DOI 10.1057/978-1-137-59780-9

(eBook)

Library of Congress Control Number: 2016942403
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Preface and Acknowledgments

Our project began with a question that was raised by Shingo Ito, who is
also a contributor to this volume: ‘Has Taiwan completed catching-up
yet?’ This question sounded quite simple at first, but after brief consideration proved to be broad and deep, and some fundamental questions
struck us. Taiwan seems to have already graduated from catching-up.
If so, when did it graduate? And what indicators show that Taiwan has
already graduated? These questions suggested that we needed to reconsider and refine not only our understanding of Asian development based
on the conventional catch-up industrialization theory but also the theory
itself.
We asked researchers who had studied industrialization in Asian countries to join the project. The countries that they researched included
South Korea, China, Malaysia, Indonesia, and India. Their broader picture of Asian development contributed to expanding the scope of our
study. The early latecomers Taiwan and South Korea attained high-speed
growth through catch-up industrialization and then started to graduate from catching-up. However, late latecomers such as Southeast Asian
countries, China, and India have not simply followed the early latecomers but have begun to seek development paths different from catch-up
industrialization, considering changing conditions under globalization.
Their deviation from catch-up industrialization was integrated into our
study.
v

vi

Preface and Acknowledgments

Starting the project, we immediately found that our questions were
much more complicated than we had initially thought and that our
approach to the questions varied widely. Accordingly, we spent a long time
discussing the problems in building and consolidating a common analytical foundation. Should we argue on the level of the macro-economy,
industries, and sectors, or firms? Should we focus on the reductions that
have occurred in disparities between Asian latecomers and advanced
countries in income, technology level, or some other factors or should
we focus on the mechanisms that brought about the reductions? How
should we address the relationship between catch-up industrialization
and other development mechanisms, which are intimately connected?
As the Introduction shows, we agreed that we should examine industry/sector-level catching-up, focus on the mechanisms, and distinguish
catch-up industrialization from other mechanisms and investigate their
interactions as a central research topic. A more detailed explanation is
provided in the Introduction.
Of course, we have not solved all the problems, and in fact, there are
many more unsolved problems than solved ones. Furthermore, solving one problem often creates new problems. For instance, our study
includes contrasting cases—one chapter shows an industry that successfully graduated from catching-up and another shows an industry that
failed to graduate. Although the respective chapters demonstrated the
process and mechanism in each case, we were still unable to integrate the
case studies and clarify all the factors that caused the differences between
them.
The many remaining questions signify that the catch-up industrialization theory, which was presented by Gerschenkron more than half a century ago, is not yet exhausted and we can derive new research questions
from the theory if we extend and modify it. The discovery of the theory’s
potential may be the most significant contribution of our study, and we

wish to realize this potential in future work. We also hope that our work
will encourage other researchers to study Asian economic development.
This work is the result of our two-year project ‘Catch-Up Industrialization
in the 21st Century’ from 2013 to 2015, sponsored by the Institute of
Developing Economies (IDE-JETRO). We completed our research project thanks to the support, advice, and encouragement of many people.


Preface and Acknowledgments

vii

We would like to express our deep gratitude to all of them. Many people
in Asian countries gave interviews and offered valuable information and
insightful views based on their plentiful experience. Our study was also
refined by suggestions from many scholars in this research field. In particular, Dr Akira Suehiro, Dr Hitoshi Hirakawa, Dr Ryoshin Minami,
and Dr John Humphrey shared their profound thoughts on catchup industrialization and provided useful comments. Our colleagues,
Ms Taeko Hoshino, Dr Momoko Kawakami, Mr Yasushi Ninomiya, and
Dr Byeongwoo Kang, attended many meetings and discussed our work,
which contributed greatly to deepening it. The support of IDE’s editorial
and administrative staff helped us to conduct our projects. We also highly
appreciate the assistance provided by our editors at Palgrave Macmillan.
Chiba, Japan
30 November 2015

Yukihito Sato
Hajime Sato



Contents

1

2

Introduction: Varieties and Alternatives of Catching Up:
Asian Development in the Context of the Twenty-First
Century
Yukihito Sato and Hajime Sato
1.1 Introduction
1.2 Background
1.3 Goals, Tasks, and Approach
1.4 Preceding Studies on Catch-Up Industrialization
1.5 Research Results and Concluding Remarks
References
Innovations Derived from Backwardness: The Case of
Taiwan’s Semiconductor Industry
Yukihito Sato
2.1 Introduction
2.2 Research Questions and Analytical Approach
2.3 Pure-Play Foundry Model in the Fabrication Sector:
Innovation Induced by Backwardness
2.4 MediaTek’s Success in the Design Sector: Innovation
Emerged from Following

1
1
2
5
8

16
24

27
27
28
32
43

ix


x

Contents

2.5 Conclusion
References
3

4

5

The Narrow ‘Breadth of R&D’ and the Bottleneck
of Technological Catch-Up: A Case Study of Taiwan’s Flat
Panel Display Industry from the Perspective of the R&D
Strategy of AMOLED
Shingo Ito
3.1 Introduction

3.2 The ‘Ultra-Compressed Catch-Up’ of Taiwan’s
FPD Industry and Its Subsequent Difficulties
3.3 The Characteristics of R&D Management of
Taiwan’s FPD Industry
3.4 The Contraction of the ‘Breadth of R&D’:
The Suspension and Stagnation of AMOLED
Development
3.5 The Difficulty of ‘Legitimization for Innovation’
for Taiwan’s FPD Industry
3.6 Conclusion
References
Industrial Development and Linkage Formation in Korea:
A Case Study of the FPD Industry
Hidemi Yoshioka
4.1 Introduction
4.2 Formation of Korean FPD Components, Materials,
and Equipment Industries
4.3 Growth of Korean Suppliers
4.4 Localization of Production and R&D by Japanese
Suppliers
4.5 Conclusion
References
The Catch-Up Process in the Korean Steel Industry
Makoto Abe
5.1 Introduction

48
50

55

55
57
63

71
78
80
83

89
89
92
99
109
117
119
125
125


Contents

5.2 Framework
5.3 The First Wave of Innovation
5.4 The Second Wave of Innovation
5.5 A Third Wave of Innovation?
5.6 Conclusion
References
6

7

8

Advantages of Backwardness and Linkage Effects:
The Steel Industry in Asia
Hajime Sato
6.1 Introduction
6.2 Late Industrialization and Steel in the Development
Literature
6.3 Subsequent Development of Steel-Making
Technologies
6.4 Experiences in Asian Countries
6.5 Concluding Remarks
References
‘Catch-Down’ Innovation in Developing Countries
Tomoo Marukawa
7.1 Introduction
7.2 ‘Catching Up’ and Intermediate Technology
7.3 Several New Concepts on Innovation in Developing
Countries
7.4 Several Cases of Catch-Down Innovation in China
7.5 Conditions that Give Rise to Catch-Down Innovation
References

xi

127
130
137

144
146
148

153
153
155
160
165
177
179
183
183
187
194
196
206
208

Curse or Opportunity? A Model of Industrial Development
for Natural Resource–Rich Countries on the Basis of
Southeast Asian Experiences
211
Yuri Sato
8.1 Introduction
211
8.2 Model of Industrial Development for Natural
Resource–Based Industries
213

xii

Contents

8.3

Back-and-Forth Industrial Development:
Empirical Evidence from Indonesia
8.4 Conclusion
References
9

10

Resource-Based Industrialization of the Malaysian Palm
Oil Industry
Hiroshi Oikawa
9.1 Introduction
9.2 Malaysia’s Palm Oil Industry and Its Development
9.3 Various Factors in the Development of Malaysia’s
Palm Oil Industry
9.4 Conclusion: Lessons from the Development of
Malaysia’s Palm Oil Industry
References
The Development of the Indian Software Services
Industry
Jyoti Saraswati
10.1 Introduction
10.2 Industry Overview

10.3 The Development of the Indian Software Services
Industry
10.4 Issues and Implications for Theories of Latecomer
Development
10.5 Concluding Remarks
References

Index

222
241
243

247
247
250
263
273
275

277
277
278
284
293
295
296
299

Notes on Contributors

Makoto Abe Director, East Asian Studies Group, Area Studies Center, Institute
of Developing Economies, IDE-JETRO, Japan. He has researched and written
widely on issues relating to South Korea’s economic development, especially
focusing on chaebols.
Shingo Ito Senior Economist, China unit, Research Department-Asia, Mizuho
Research Institute, Japan. His research interests include the development of
Taiwan’s industries and cross-Taiwan Strait economic relations.
Tomoo Marukawa Professor, Institute of Social Science, University of Tokyo,
Japan. He has published extensively on the Chinese economy, the labor market,
industrial development, and industrial agglomerations.
Hiroshi  Oikawa Professor, Faculty of Commerce, Kansai University, Japan.
His current interest is in Malaysia’s industrial development and he has published
on various aspects of foreign direct investment, entrepreneurship, and the global
value chain.
Jyoti  Saraswati Professor of International Economics, Stern Business School,
New York University, London Campus. He has published widely on the evolution of high-tech industries in the developing world, including a recent book on
the Indian software industry.
Hajime  Sato Deputy Director, South Asian Studies Group, Area Studies
Center, Institute of Developing Economies, IDE-JETRO, Japan. His research
xiii


xiv

Notes on Contributors

interests include the political economy of development in Asian countries and
institutional change in late industrialization.

Yukihito Sato Director-General, Inter-disciplinary Studies Center, Institute of
Developing Economies, IDE-JETRO, Japan. He has published widely on the
political economy of Taiwan’s industrial development, especially focusing on the
formation and development of its high-tech industry.
Yuri  Sato Executive Vice President, IDE-JETRO, Japan. She has worked and
published extensively on the Indonesian political economy, industry, and business, especially on conglomerates as well as small and medium firms with a longterm perspective.
Hidemi Yoshioka Professor, Faculty of Law, Kumamoto University, Japan. Her
research interests include South Korea’s economic development and her recent
book is on the development and transformation of the South Korean semiconductor industry.


List of Figures

Fig. 2.1
Fig. 3.1
Fig. 3.2
Fig. 4.1
Fig. 4.2
Fig. 4.3
Fig. 5.1
Fig. 7.1
Fig. 8.1
Fig. 8.2
Fig. 8.3
Fig. 8.4
Fig. 8.5
Fig. 8.6

Technology level of Taiwan’s fabrication sector (line width
of mass production)

Operating margins of major FPD makers
Number of OLED-related patent acquisitions in the USA
(by nationality)
OLED equipment suppliers of Samsung
OLED equipment suppliers of LG
Capital spending by major LCD panel firms
Crude steel production of the leading Japanese and
Korean Steel Companies
Catch-down innovation and other related concepts
Catch-up industrialization: the model of
staged development
A model of industrial development for natural
resource-rich developing countries
Estimated manufacturing value added in Indonesia,
1870–1975 (1971 = 100)
Manufacturing value added in Indonesia, 1960–2014
Rise and fall of Indonesia’s manufactured exports,
1975–2010
Changes in the composition of resource-based,
labor-intensive, and capital-intensive goods in Indonesia’s
manufacturing industry, 1985–2000

37
61
70
98
99
113
126
196

214
217
223
224
232

235
xv


xvi

Fig. 8.7
Fig. 8.8
Fig. 9.1
Fig. 9.2
Fig. 9.3
Fig. 9.4
Fig. 10.1
Fig. 10.2

List of Figures

Index of terms of trade in Indonesia, 1968–2013
(2010 = 100)
Rise and fall of Indonesia’s manufacturing shares of GDP,
1970–2014
World market share of major palm oil producers
(1960–2013)
World market share of major palm oil exporters

(1960–2013)
Exports of Malaysian crude and processed palm oil
(1960–2013)
Land area of palm oil plantation by ownership
Industries within the IT sector
Firm types and contributions to industry revenues

236
238
251
252
253
256
279
283


List of Tables

Table 1.1
Table 2.1
Table 3.1
Table 3.2
Table 3.3
Table 3.4
Table 4.1
Table 4.2
Table 4.3
Table 6.1
Table 6.2

Table 8.1
Table 8.2
Table 8.3
Table 9.1
Table 9.2
Table 9.3

Income growth of Asian countries
Composition of the world’s 20 largest semiconductor
companies in 2000 and 2011
Global share of Taiwan’s FPD industry
R&D spending among FPD makers
Number of LCD panel-related patent acquisitions in
the USA (by company and manufacturing processes)
Number of LCD panel-related patent acquisitions in Taiwan
(cumulated data up to 2010, by nationality and company)
LCD component, material, and equipment suppliers
located in Korea
OLED component and material suppliers located in Korea
Local subsidiaries of Japanese LCD components, materials,
and equipment suppliers in Korea
Steel consumption and introduction of integrated
steelworks
Linkage effects of the steel industries in Asian countries
The historical transition of Indonesia’s leading export items
The top 10 export items of Indonesia, 1993
The top 10 export items of Indonesia, 2011
World major production of 17 edible oils (1990–2013)
Annual average prices of world vegetable oils (1990–2013)
World major production of 17 edible oils (1990–2013)

3
40
58
66
68
69
94
97
110
166
172
226
233
237
270
271
272
xvii


xviii

List of Tables

Table 10.1 Technical and commercial capabilities of software service
firms by selected countries
Table 10.2 Leading software service firms from major software service
exporting countries in 2012

284
285


1
Introduction: Varieties and Alternatives
of Catching Up: Asian Development
in the Context of the Twenty-First
Century
Yukihito Sato and Hajime Sato

1.1

Introduction

How can we reduce the income gap between developing and developed
countries? This has long been an important issue for society to solve. The
catch-up industrialization strategy has been considered one of the most
effective solutions, as exemplified by the cases of South Korea and Taiwan.
From the 1960s to the 1980s, the strategy allowed them to pursue the
path of industrialization previously traveled by advanced countries, but at
a faster pace and to radically transform themselves from low-income agricultural economies to middle-income industrialized economies. As Rodrik
(2014) points out, ‘[w]ith the exception of natural-resource bonanzas,
extraordinary high growth rates are almost always the result of rapid structural transformation, industrialization in particular’ (Rodrik 2014, p. 8).
In the 1990s, however, the development of latecomer countries has
increasingly deviated from the single and rigid path of catch-up industrialization. Early developing countries such as South Korea and Taiwan have
Y. Sato (
) • H. Sato
Institute of Developing Economies (IDE-JETRO), Japan
© IDE-JETRO 2016

Y. Sato, H. Sato (eds.), Varieties and Alternatives of Catching-up,
DOI 10.1057/978-1-137-59780-9_1

1


2

Y. Sato and H. Sato

started seeking other paths beyond the end point of catch-up industrialization. Other countries have attempted paths other than catch-up industrialization based on their individual advantages, and some of these countries
have discovered unique paths to success. It seems that these changes have
become more apparent in the new century. In this context, this volume
reconsiders our understanding of the development of latecomers in Asia
based on the catch-up industrialization theory by taking these changes into
consideration and, in so doing, aims to reassess and elaborate on the theory.
This introductory chapter consists of the following four sections.
The next section examines the changes in the development of Asian latecomers as the background of our research. The third section describes
our goals, tasks, and approach. The fourth section reviews theoretical and
empirical studies on catch-up industrialization. Lastly, the fifth section
summarizes the nine chapters of the volume and draws some implications,
if not conclusions, from them.

1.2

Background

During the last half-century, Asian countries have experienced tremendous
growth. Table 1.1 shows a rough sketch of their economic performance.
These countries have grown faster than the USA and have remarkably

reduced the income gap, with the exception of India. South Korea and
Taiwan have maintained rapid growth for 50 years and, as a result, their
per capita gross domestic product (GDP) has risen from around 5 %
of per capita GDP in the USA in 1963 to more than 40 % in 2013.
Southeast Asian countries such as Malaysia and Indonesia grew moderately in the 25 years from 1964 to 1988 and the gap between them and
the USA hardly changed. However, in the next 25 years from 1989 to
2013, their speed of growth exceeded that of the USA and they succeeded
in considerably closing the income gap. India’s economy was stagnant
compared to the other prospering countries during the first 25 years, and
the gap between it and the USA widened. In the second 25 years, India
began to grow at a faster pace than the USA and the gap had shrunk to
its original level by 2013. China is estimated to have performed similarly
to India during the early years, but then achieved unprecedented growth
after introducing reforms in the late 1970s. Although its per capita GDP


1 Introduction: Varieties and Alternatives of Catching Up

3

Table 1.1 Income growth of Asian countries
USA

Japan Korea Taiwan China Malaysia Indonesia India

Per capita 1963 3,151
704
138
189
–

288
GDP (USD) 1988 21,483 24,593 4,813 6,369
281 2,050
2013 53,042 38,634 25,977 21,902 6,807 10,538
Comparison 1963 100.0
22.3
4.4
6.0
–
9.1
to US
1988 100.0 114.5 22.4
29.6
1.3
9.5
(US = 100) 2013 100.0
72.8 49.0
41.3 12.8
19.9

73
515
3,475
2.3
2.4
6.6

89
362
1,499

2.8
1.7
2.8

Source: Authors’ elaboration based on data from UN, Statistical Yearbook for
1963, World Development Indicator Data Query ( />indicator/) for 1988 and 2003, and National Statistics, R. O. C.(t.
gov.tw/) for Taiwan

was only slightly more than 1 % of that of the USA in 1988, the figure
had risen to as high as 12.8 % in 2013.
In most cases, a substantial portion of economic growth in Asian
countries can be attributed to industrialization. Indeed, these successful
cases of industrialization generally correspond to the theory of catch-up
industrialization that has been forged gradually over the years, primarily
based on the idea of the ‘advantages of backwardness’ put forward by
Gerschenkron (1962). However, the growth mechanisms of Asian countries began changing around 1990.
Some of these changes were caused internally by the progress of catchup industrialization itself. South Korea and Taiwan reached the completion stages of catch-up industrialization in the 2000s. The per capita
GDP of these two countries now exceeds 20,000 USD and some sectors
of their high-tech industries can be considered state of the art, confirming that they have almost finished the process of catch-up industrialization. Accordingly, some questions specific to this stage have emerged.
First, although a latecomer has the possibility of closing the gap with
advanced countries by exploiting the advantage of backwardness, it cannot complete the catching-up process by depending solely on this catchup mechanism because the advantage of backwardness disappears before
completion. Therefore, other mechanisms were necessary for South
Korea and Taiwan to finish the catch-up process and to compete headto-head with advanced countries. Second, a closer inspection of the situation reveals that in South Korea and Taiwan, some industries have still
struggled to finish the last stage and reach the level of advanced countries,


4

Y. Sato and H. Sato

whereas other sectors have already succeeded in completing the catching-up
process. These differences across industries indicate that the mechanisms
for completing catch-up industrialization are, to some degree, industryspecific. Third, at the advanced stage of catch-up industrialization for
countries such as South Korea and Taiwan after the 1990s, their economies have become highly complex because of the development of diverse
industries, which may be a result of catching up. Consequently, the
industries have begun to dynamically interact with each other, generating
another development mechanism. As a result, catch-up industrialization
has become merely one mechanism of development, yet nevertheless a
very important one.
Other changes are external, and have affected both advanced latecomers
and late latecomers. Important changes since the 1990s include the progress
of communication and transportation technologies, the shift of technology
in the manufacturing sector from integral to modular type, the construction of transnational fragmented value chains, the end of the Cold War, the
progress of economic liberalization—particularly in China and India, which
have the world’s two largest populations—and the rapid growth of international capital flows both in volume and speed, among others. Most of these
changes can be summarized in one word: globalization.
It is important to understand that globalization and other changes
have nullified some of the main premises for catch-up industrialization.
For instance, the conventional catch-up industrialization strategy, which
often explicitly or implicitly depended on the domestic market, is far
less effective for many countries. This shift has occurred mainly because
radical changes in technology and institutions have substantially reduced
the barriers between domestic and overseas markets. Meanwhile, changes
relating to globalization have produced opportunities for creating different mechanisms from those of conventional catch-up industrialization.
As discussed below, new mechanisms include modified versions of catchup industrialization as well as entirely new types.
To sum up, the development of latecomer countries since the 1990s
cannot be understood solely according to the conventional view of catchup industrialization. The internal and external changes in development
mechanisms in latecomer countries require us to reconsider and reconstruct the framework of our study.

1 Introduction: Varieties and Alternatives of Catching Up

1.3

5

Goals, Tasks, and Approach

1.3.1 Goals and Tasks
The theory of catch-up industrialization has been the standard view of
the development of latecomer countries. It has two core propositions:
first, economic growth depends on technological progress; and second,
a latecomer may achieve technological progress faster than advanced
countries by exploiting advantages of backwardness. The theory combines these two propositions and maintains that a latecomer country
is equipped to take advantage of the opportunity to attain compressed
economic growth. As discussed in Section I, however, the theory is now
being challenged by various changes in the Asian countries, especially
since the 1990s. There is an urgent need to reexamine our view of the
development of latecomers and refine the theory of catch-up industrialization to acquire a more accurate and comprehensive understanding of
the development of latecomer countries and address current trends.
Toward this goal, our study takes on three tasks.
The first task is to closely examine the processes of catch-up industrialization taking into consideration the aspects that have not been included
properly in the conventional theory of catch-up industrialization. More
specifically, we look at factors other than just technological ones, such as
demand for the manufacturing goods produced by latecomer countries,
in contrast to the conventional theory, which generally tends to focus
on technologies and the supply-side factors. Nontechnological factors
may generate opportunities for latecomer countries to build up more
diversified development paths, although they may also present obstacles
that hinder their development. In addition, we examine the interactions

between technological and nontechnological factors.
The second task is to analyze the relationship between catch-up industrialization and other development mechanisms, particularly forward and
backward linkage effects. It is highly likely that catch-up industrialization
and linkage effects and other mechanisms might complement or substitute each other. The interaction between development mechanisms have
not been fully addressed by the conventional theory of catch-up industri-


6

Y. Sato and H. Sato

alization, although Gerschenkron (1962) briefly hinted at the combination of linkage effects and the advantage of backwardness when citing
the example of interactions between the steel industry and the railway
industry.
The third task is to highlight other newly emerging mechanisms
besides catch-up industrialization that make a significant contribution
to development. This task also includes exploring factors and conditions
that have caused these mechanisms to become dominant. Through this
task, we attempt to place catch-up industrialization as one of various
development mechanisms. Furthermore, clarifying the alternative mechanisms and their foundations is expected to contribute to our review of
the conditions for catch-up industrialization.
In addition to these three tasks directly related to our goals, our
research also contributes to the reconsideration of the roles of various
actors, such as local firms, multinational corporations, and governments,
as well as the interactions among them. Studies on catch-up industrialization have been closely associated with debate over which actor leads the
development of latecomer countries, particularly with respect to the role
of government in development. Our study attempts to reassess the role of
various actors from an alternate viewpoint of the conventional theory of
catch-up industrialization.

1.3.2 Approach
To accomplish the tasks discussed above, our study employs a case study
approach at industry and sector levels. The industries studied in this
project include the semiconductor industry, the flat panel display industry,
the steel industry, the palm oil industry, and the software service industry.
Why do we choose this approach? The catching up by a latecomer can
be discussed at three levels: the macro level, the industry/sector level, and
the firm level. At the macro level, catching up means reducing the income
gap between the latecomer and advanced countries. In mainstream economics, this issue is treated as a convergence problem. Indeed, studies
on a latecomer’s development originate from a macro-level interest in
reducing the income gap between developing and developed countries.